Omar Slim and Andy Suen, co-heads of Asia fixed income at US asset manager PineBridge Investments, share their insights on the outlook for Asian high yield bonds and outline investment opportunities.

Asia high yield’s performance in the first half of 2024 is likely to continue due to falling default rates, enhanced market diversification, and high yield carry, according to Omar Slim and Andy Suen, co-heads of Asia fixed income at PineBridge Investments.

“After several challenging years owing to China’s property crisis, Asia high yield (HY) bonds delivered their strongest showing in the first half of 2024 than in any comparable period since the global financial crisis,” they said in a note.

With a total return of 10.5 per cent, Asia HY also outperformed other major credit markets, including US high yield (+2.6 per cent) and global high yield (+3.2 per cent), which have been more sensitive to rate volatility.

They highlighted that although defaults in Asia have dominated headlines in recent years, Asia HY ex China property has maintained a lower default rate than US HY. Slim and Suen expect this trend to continue over the next two years, supported by the region's macroeconomic backdrop, issuers’ access to cheaper local funding channels, and a fairly distributed maturity schedule.

“The Asia HY market is now much more diversified and Asia HY continues to offer higher yields relative both to historical averages and developed market HY bonds,” they continued. These levels are at the higher end of their 10-year historical range, close to the 90 percentile. “Asia HY is one of the few market segments that still offers potential for spread compression.” 

China
Slim and Suen emphasised how the recent supportive measures for the housing market are positive steps towards reducing the risk of a further deflationary spiral, but they believe that more action is needed to stabilise the property market. They are cautious on the outlook for the sector and believe that investors should stay highly discerning, focusing on select names with quality rental portfolios.

Outside of property, they see opportunities in select industrial companies in China. These are benefiting from pro-growth policies and the loose monetary policy stance, which is bolstering access to cheap funding. The onshore and offshore funding cost differential remains significant, creating dislocation opportunities in the offshore bonds of select high quality HY companies that have access to onshore channels.

Beyond mainland China
Away from the mainland, Slim and Suen think that the macro environment of the broader Asian market remains robust, and they see opportunities for investors to gain exposure to the world’s fastest-growing region. They favour Macau’s gaming sector, where fundamentals are still improving following the territory’s Covid reopening. Macau’s gross gaming revenue has recovered to 75 per cent of its pre-Covid levels. Consequently, they expect gaming to surpass pre-Covid levels in 2025. They believe bonds will enjoy support from the positive credit rating trajectory and issuers’ proactive management of maturity profiles.

Slim and Suen also see opportunities in select Indian corporates that are well-positioned to benefit from the country’s economic expansion. One example is the renewable energy sector, which continues to benefit from structural tailwinds catalysed by the country’s goal of generating half of its electricity from non-fossil fuels by 2030.

They also like select commodity-related issuers in Indonesia: “These companies have strengthened their balance sheets and are also benefiting from cheaper local funding channels, which enhance their financial flexibility.”